Fundamentals of Accounting, Business and Management I

3rd Quarter
Grade 11

LESSON 3: ACCOUNTING EQUATION

ASSETS LIABILITIES EQUITY

Financial Resources Financial obligations or Owner’s claims on the

owned by a business Debts of a business asset of a business

EQUATION

Always bear in mind these financial statements tell us how business is performing. They are the
final products of the accounting process. But how do you arrive at the items and amounts that
make up the financial statements? The most basic tool of accounting is the accounting equation.
The equation presents obligations of the enterprise and the residual interest in the assets. It states
that assets must equal liabilities and owner’s equity. The Basic Accounting Model is:

ASSETS (A) = LIABILITIES (L) + OWNER’S EQUITY (E)

Note that assets are on the left side of the equation opposite the liabilities and owner’s equity. This
explains why increases and decreases in assets are recorded in the opposite manner (“mirror
image”) as liabilities and owner’s equity are recorded.

The equation also explains why liabilities and owner’s equity follow the same rules of debit and
credit.

The logic of debiting and crediting is related to the accounting equation. Transactions may require
additions to both sides (left and right sides), subtractions from both sides (left and right sides), or
an addition and subtraction on the same side (left or right side), but in all cases the equality must
be maintained.

“So stick to the fight when you're hardest hit— It's when things seem worst that you must not quit.”

JLM
 Fundamentals of Accounting, Business and Management I
3rd Quarter
Grade 11

DISCUSSION QUESTION:

Read the following questions and try to master the corresponding answers.

1. What is accounting equation?

Answer: The accounting equation espouses that assets must equal the sum of liabilities and
owner’s equity. The equal sign in the equation ensures balance of movement in the three main
accounts being used in accounting.

2. Should the accounting equation be balanced at all times? Why?

Answer: YES. Basic accounting equation serves as the backbone of the entire accounting cycle
and financial reporting system.

3. What is an account?

Answer: An account is individual accounting record of the movements (increases and

decreases) of specific accounts.

4. What are the accounts in the accounting equation?

Answer:These are the assets, liabilities and owner’s equity.

5. What are assets, liabilities and owner’s equity?

Answer: Assets are resources owned by the business.

Liabilities anything owed by the business.
Owner’s equity is the ownership/right of the owner.

6. Did you notice that all assets are in the left side and all liabilities are in the right side of the
equation?Why?

Answer: Yes. The left side of the equation is the debit side, and the right side of the equation is
the credit side

“So stick to the fight when you're hardest hit— It's when things seem worst that you must not quit.”

JLM